Economic Impact

The burden of maintaining a large, modern national security establishment has always weighed heavily on the vulnerable Israeli economy. The total defense budget for Israeli fiscal year (FY--see Glossary) 1988, including United States assistance of US$1.8 billion, amounted to US$5.59 billion. Its principal components were local spending on equipment, supplies, and construction worth US$2.05 billion, personnel costs equivalent to US$1.25 billion, and purchases abroad of US$1.87 billion.

The defense budgets for FY 1987 and FY 1986 totaled US$5.6 billion and US$4.98 billion, respectively. The budget submission to the Knesset indicated that the objective was to maintain overall local costs--i.e., those items not supported by United States assistance--at the same level in both FY 1987 and FY 1988. Several factors made it difficult to compare the defense effort on a year-to-year basis. For example, defense budgets were affected by the immediate costs and later savings associated with cancellation of the Lavi fighter aircraft project. The additional wages needed for the extended call-up of reservists in 1988 to help contain the uprising in the occupied territories also depleted resources available for normal defense requirements.

As the largest single item in the government budget, defense spending absorbed a major share of the budgetary cuts within the Economic Stabilization Program of July 1985. The cumulative reductions in domestic defense spending from FY 1983 through FY1986 were estimated at US$2.5 billion, representing a 20 percent decrease in total domestically financed military expenditures. The defense burden as a ratio of GNP had averaged about 9 percent until 1966. Real defense expenditures increased dramatically as a result of the June 1967 War and the October 1973 War. They subsequently remained steady at about 10 to 15 percent of GNP, excluding foreign military purchases, and accounted for 20 to 25 percent of GNP when foreign military purchases (almost entirely funded by the United States) were included.

The Israeli government estimated the defense-related foreign exchange burden at US$2.1 billion in FY 1985 and predicted that it would remain at about that level during the foreseeable future. This included self-financed military imports, indirect imports (such as fuel and materials for the defense industry), and debt servicing of defense-related loans. The Ministry of Finance estimated that these expenditures contributed 53 percent of Israel's total deficit in the balance of payments in 1985. According to the ministry, the share of defense expenditures in the national budget, exclusive of debt servicing, was 43 percent in FY 1984, falling to 39 percent in FY 1985 and FY 1986 (see Provision of Defense Services , ch. 3).

According to an analysis by the United States Arms Control and Disarmament Agency, Israel ranked among the five or six highest countries in the world in terms of military expenditures as a ratio of G93b GNP. It ranked eighth in terms of military expenditures per capita (US$875 in 1985) and second after Iraq in relative size of the armed forces (47.9 uniformed personnel per 1,000 population). Israel ranked about twenty-fifth in the world, below a number of Arab and communist countries, in terms of military expenditures as a ratio of total central government expenditures, based on 1985 defense budgets.

The economic burden of national security was perhaps most apparent in terms of manpower, a vital resource in an industrialized nation of only about 4.4 million people. The proportion of soldiers to civilians at any given time was eight times higher than the world average and historically had been far higher than in any other country. This impact was magnified during mobilization of the reserves, which has been increasingly frequent since 1973, when the failure to mobilize promptly proved to be a costly mistake. A full mobilization of the nation's nearly 500,000 reserves acted as a sudden brake on virtually all economic activity. Even partial mobilizations, which regularly occurred several times annually, had a profound impact on national production, as did the yearly periods of active duty served by each reservist. Such economic disruption was a principal reason why Israeli strategists emphasized that wars must be of brief duration (see Concepts of National Security , this ch.).

Data as of December 1988